How is the growing interest in ESG issues shaping pension scheme investment decisions?

Is the difference between ESG integration and values driven investment sufficiently well understood? To what extent do pension scheme members care about these issues and how are pension schemes responding?

New research by Aberdeen Standard Investments canvassed the views of almost 9,000 savers and investors, and 120 pension schemes and pension consultants on these and other ESG related issues. This article summarises the findings and highlights how ESG considerations have moved to centre stage.

ESG analysis as distinct from ESG policy; clarifying the difference

The research amongst pension professionals explored two main lines of inquiry:

  • The perceived value of integrating ESG factors into the investment process
  • Attitudes to values driven approaches, for example, ethical, sustainable, socially responsible and impact investment.

The distinction between the two is not universally understood; one in three (32%) of pension professionals did not feel sufficiently well informed about how or why investment managers integrate ESG into the investment process. As one pension consultant said, “There are still quite a few misconceptions and confusion about the extent to which you’re talking about ESG issues for financial reasons, confusing it with moral and ethical judgements; and definitely some confusion about the type of investment products we’re talking about. There are a lot of different techniques you can use to incorporate ESG issues into investment processes, but people tend to fixate on negative screening as the primary method, and these days that is no longer the case”.

Regulatory requirements are likely to increase engagement

The Department for Work and Pensions’ (DWP) directive requiring pension trustees to update their statement of investment principles to reflect how they take account of financially material considerations, including ESG and climate change (by October 2019), is likely to raise awareness and promote engagement, or as another consultant put it, “the tone from the regulator has changed and we expect that the new regulations will start conversations both ways on the art of the possible”.

The influence of the United Nations Sustainable Development Goals (SDGs)

With an increasing number of asset managers aligning investment goals to the UN SDGs, the research asked to what extent this was understood. 57% of pensions professionals surveyed did not feel sufficiently well informed about how the SDGs can influence investor choices. Overall, these were considered to be ‘high level goals’ and as one respondent said in relation to his pension scheme, “translating them into the investment process will take time”. Consultants said that they would remain focused on the risk management intention of ESG integration, leaving matters of policy, such as adherence to the SDGs, to their clients.

Understanding saver perspectives

The theme of this year’s Pension and Lifetime Saving Association’s conference was “understanding saver perspectives” : a timely topic in light of the consumer phase of the research. It found that one in four women and one in five men surveyed like the idea that their investment choices could make a positive difference in the world. Whilst only 20% of respondents had heard of the UN SDGs before taking the survey, talking about ESG issues and the UN SDGs prompted them to want to know more about how and where money is invested. Awareness of the UN SDGs was highest amongst ethical investors and 18-24 year olds, who spoke passionately about their motives for investing responsibly, in ways ‘which are morally, sustainably acceptable’. They did not want their investments or pension contributions “earning money at someone else’s peril… to harm anybody else, or to harm the environment”.

ESG as a means of encouraging member engagement

73% of pension professionals surveyed agreed that ESG issues could be a new way of engaging the next generation of members. One membernominated trustee emphasised the importance of listening to the next generation. ‘In terms of investment strategy, you’ve got to look at generation K and millennials and make sure they get a decent outcome. If those generations have a different social outlook from those people who are forty years older than them, surely we should be listening to their views, to make sure that their best interests are served?”

73% of pension professionals surveyed agreed that ESG issues could be a new way of engaging the next generation of members.

Consultants agreed: “there is a lot of potential for member engagement with their pensions through general concepts like sustainable, responsible business practices, things that people can readily relate to. Climate change is clearly very topical and a significant concern for many members. Then there are other specific issues such as plastics and gender diversity”.

Performance perceptions: does ESG integration result in positive outcomes?

42% of pension professionals agreed that ESG integration results in positive outcomes in terms of performance; 14% disagreed but the majority (44%) were uncertain. The three biggest barriers to incorporating responsible and sustainable investments were reported as ‘insufficient risk and return data’ (38%), ‘insufficient knowledge and understanding’ (35%), and ‘no recommendation from our pension consultants (33%). “A lack of evidence is not a barrier to entry you fundamentally can’t do anything about”, said one consultant. “A lot of these strategies haven’t been around for long enough to be able to provide that evidence but over time, they will.”

Ratings, measures and metrics

Another potential barrier is the lack of standardised measures and metrics for assessing the effectiveness of ESG integration and for measuring impact outcomes. Half (50%) of pension professionals surveyed were dissatisfied with the way in which values driven products are described and explained, for example, the difference between an ethical fund and an impact fund; and the majority (55%) were dissatisfied (compared to 11% who were satisfied), with the way in which values driven investments are rated and can be compared on a ‘like for like’ basis.

Making ESG ‘your own’

Some larger schemes have introduced their own frameworks and systems of measurement, and emphasised the importance of an approach that suits the individual scheme; “screening or scoring ESG factors does not necessarily mean that you get to a desirable outcome. What we have focused on is discussing with our trustees what ESG really means to our scheme, to pursue that philosophy point, and then try to develop from there instead of merely screening out some stocks. From a wider perspective that will provide benefits to the performance, as well to the community”.

The future: ‘more appetite for responsible investment’

55% of pension professionals surveyed currently offer funds to DC members that enable them to invest according to their values;12% do not currently, but plan to in future. 47% said they are likely to increase allocations to investments that deliver returns for the benefit of members and society as a whole. This trend was also identified by consultants: “our practice is seeing more appetite for responsible investment amongst DC schemes where there are longer time horizons, and it’s clear that ESG issues are likely to be material within their time frame. In terms of how DC schemes communicate that to members, that’s still at a very early stage”.

47% are likely to increase allocations to investments that deliver returns for the benefit of members and society as a whole.

Amanda Young, Head of Global ESG Investment Research, Aberdeen Standard Investments, said, “the introduction of auto-enrolment has created a new generation of investors whose views on how and where their money is invested are not necessarily the same as those of generations before them. The findings highlight an appetite for sustainability in the widest sense of the word. At Aberdeen Standard Investments, ESG considerations are integrated in our investment process and have been for many years. We are long term investors and that means knowing and understanding the ESG factors affecting the prospects of the investments that we make on behalf of clients. We are working closely with pension schemes and their advisers to ensure that today’s and tomorrow’s generations of investors benefit from the positive outcomes needed to sustain them and the world we share”.

For a full understanding of Aberdeen Standard Investments’ ESG expertise and global reach, please visit 

Amanda Young
Head of Global ESG Investment Research – Aberdeen Standard Investments



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